Earnings Call Transcript - ATI Q3 2025

Operator, Operator

Hello, and welcome, everyone, to the ATI Third Quarter 2025 Results Conference Call. My name is Becky, and I'll be your operator today. I will now hand over to your host, David Weston, to begin. Please go ahead.

David Weston, Host

Thank you. Good morning, and welcome to ATI's Third Quarter 2025 Earnings Call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our third quarter results are Kim Fields, President and CEO; and Don Newman, Executive Vice President and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results, capabilities and outlook and can also be found on our website at atimaterials.com. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. Those are noted in the earnings release and in the accompanying presentation. Now I'll turn the call over to Kim.

Kimberly Fields, CEO

Good morning, everyone, and thank you for joining us. Q3 was another strong quarter for ATI, delivering results ahead of our projections, advancing our long-term strategy and strengthening our leadership in aerospace and defense. Our teams continue to perform at a high level, meeting growing customer needs and driving sustained value. Let's start with a quick overview of our Q3 results. Revenue was up 7% year-over-year, once again exceeding $1.1 billion. Adjusted EPS was $0.85, $0.10 above the high end of our projected range. Adjusted EBITDA totaled $225 million. Excluding approximately $10 million related to the sale of oil and gas rights, $215 million of adjusted EBITDA exceeded the high end of our guidance by $5 million. Adjusted EBITDA margin exceeded 20%, our highest since the pandemic and almost double 2019's margin. Both segments delivered excellent profitability. Our High Performance Materials & Components segment margins were above 24%. And Advanced Alloys & Solutions segment above 17%, driven by strong pricing, mix and increasing aerospace and defense content. Cash generated from operations year-to-date reached $299 million, a $273 million improvement from last year. We also returned $150 million to shareholders this quarter through share repurchases, with $120 million remaining under our current authorization. Given this performance and our outlook for Q4, we are raising our full-year guidance across the board. Adjusted EBITDA for 2025 now forecast between $848 million and $858 million, a $28 million increase at the midpoint. Adjusted free cash flow now forecast between $330 million and $370 million, a $40 million increase at the midpoint. Don will share more details on this in a moment. With one quarter left in 2025, I want to highlight three key themes driving ATI's continued momentum and future outlook. First, we have strong demand in our core markets, with aerospace and defense leading the way. Total A&D revenue rose 21% year-over-year in the third quarter, fueled by record defense performance and sustained demand in jet engines. This quarter, A&D reached an all-time high of 70% of total revenue, marking an important milestone in our strategy. Long-term agreements and differentiated materials are supporting consistent growth through 2026 and beyond. I'll detail what I see in these markets. Our largest market, jet engines, now 39% of total revenue, grew 19% year-over-year in Q3, with MRO representing about 50% of total engine sales. Next-generation programs such as LEAP and GTF continued to accelerate with strong production and aftermarket demand. You probably heard OEMs make those forecasts in their recent earnings calls. This sustained momentum supports long-term growth for ATI's proprietary alloys and forged turbine discs. Our order book extends into mid-2027, underscoring tight supply and the strength of our customer partnerships. As a priority supplier, we've gained additional share in content where others have faced execution challenges while maintaining pricing that reflects the value of our capabilities. Looking ahead, we expect Q4 jet engine revenue growth in the high single to low double digits. For the full year, jet engine growth is expected to exceed 20%. With multi-decade customer agreements and increasing platform demand, ATI is well-positioned for continued share gains and profitable growth through this aerospace cycle. Airframe sales grew 9% year-over-year and 3% year-to-date this quarter, supported by the ongoing ramp in Boeing and Airbus production and timing of customer orders. Boeing's production rate increase of 42 per month on the 737 and Airbus' A320 target of 75 per month by 2027 signal healthy sustained demand. We expect Q4 airframe revenues to finish modestly above 2024 levels as airframers adjust their inventory to production needs. ATI's expanded titanium capacity and advanced processing capabilities are driving share gains and improved pricing across OEM platforms, enhancing our mix of higher-value structural components and supporting continued margin expansion. Next year, we anticipate high single-digit growth in airframe revenues, driven by steady production ramps, increased ATI content and favorable pricing under new long-term contracts that start at the beginning of 2026. Beyond 2026, as build rates rise, ATI's airframe business is poised to grow faster than overall industry volumes, reflecting our differentiated titanium portfolio and deep customer alignment. Defense markets remain exceptionally strong. Revenue increased 51% year-over-year and 36% sequentially, reflecting broad-based strength across naval nuclear, rotary craft, missile and armored vehicle programs. Our diversified product base benefits from both U.S. and allied spending growth. We continue to qualify our new programs entering early production. ATI's defense business has now delivered three consecutive years of double-digit growth, outpacing defense spending. Highlights this quarter include being named Supplier of the Year by General Dynamics U.K., underscoring customer trust and ATI's performance and reliable delivery. Missile and propulsion programs are expanding rapidly. ATI's advanced materials are increasingly specified in THAAD and PAC-3 systems, where production is accelerating to meet recapitalization demand. We're also supporting emerging initiatives like Golden Dome, positioning ATI for above-market growth into the next decade. Emergent naval nuclear also contributed meaningfully to Q3 performance, showcasing the resilience and scale of our defense portfolio. With expanding qualifications, multiyear visibility and growing international participation, defense is set for continued record performance as modernization and replenishment programs ramp worldwide. Bottom line, A&D remains the foundation of ATI's growth. My second key theme, operational excellence and disciplined execution, are the backbone of our performance. This quarter, the team delivered strong productivity gains. Across ATI, we're delivering what we call the triple threat: higher uptime, improved first-pass yield and expanding manufacturing capabilities. We have examples across the company. In our nickel remelt operations, output increased by double digits. In the isothermal flow path, heat treat cycle time improved three times. Accelerated throughput is lower in cost and freeing capacity for our crucial jet engine products. At our Specialty Materials business, we also expanded powder atomization capacity by over 25%, improving yield and quality. We expect to see the benefits of this improvement in our first half 2026 shipments. Our Specialty Rolled product business achieved a new record for monthly coil shipments, another demonstration of increased throughput and efficiency. Specialty Alloys and Components unlocked more than 20% additional capacity in the zirconium sponge process. This was accomplished through standard work and maintenance optimization requiring minimal capital investment. As a reminder, ATI is the leading producer of high-purity zirconium at scale in the Western world. This material is important to national defense, energy and aerospace. It's a small but highly profitable part of our business today, with significant growth potential ahead. Collectively, these initiatives have expanded available capacity by roughly 10%, with the greatest impact in our differentiated mode products and contribute to our margin gains. These are not just operational wins; they enhance reliability, increase asset utilization and drive long-term earnings growth. By securing additional customer qualifications on new equipment and products, we're building the foundation for ATI's next chapter of performance and profitability. My third theme this quarter, our strategy and investments continue to drive long-term value. Our strategy is working. With 70% of revenue now coming from aerospace and defense, ATI is firmly focused on our most differentiated, high-value materials and markets. Our nickel investment expands differentiated capacity at the top of the value chain. You'll recall, we're the sole-source producer for five of the seven most advanced super alloys in the jet engine. Before we decide to invest, each project undergoes a disciplined review process, requiring projected internal rates of return above 30% and clear alignment with long-term customer contracts. In many cases, our customers are funding alongside us, reinforcing shared confidence in the demand outlook and guaranteeing needed capacity is in place for the future. We'll continue deploying capital with focus and discipline, prioritizing differentiated products, high-return investments and strategic partnerships that sustain ATI's leadership and create long-term value. I've been recently asked by a few investors whether investing in nickel melt capacity will negatively impact our pricing. The short answer is no. Our focus is on our most differentiated products. This is about expanding the competitive moat while supporting the engine ramp and our customers' ambitious growth targets. In summary, strong aerospace and defense demand, a relentless focus on operational excellence, and a strategy that's creating long-term value resulted in Q3 being ATI's strongest quarter of the year. We're well positioned to extend our momentum to finish 2025 strong. And with that, I'll turn it over to Don.

Donald Newman, CFO

Thanks, Kim. I'll provide some additional detail on our financial performance and discuss our outlook for the fourth quarter and full year. In Q3, we once again delivered results ahead of expectations. Adjusted EBITDA was $225 million, including a $10 million gain from oil and gas rights sales. Excluding that, EBITDA of $215 million represents a 19% year-over-year and 6% sequential improvement, with margins at 20% or 19.1% excluding asset sales. Strong price, mix and volume performance, particularly in defense and jet engines, drove this outperformance, resulting in nearly $10 million of operational upside versus our prior guidance range midpoint. Year-to-date, our sales are up 7% and adjusted EBITDA is up 19% over the prior year, excluding asset sales. This reflects improved mix, cost discipline and incremental margins, which remain near 50%, demonstrating the leverage of our business model. Segment performance was strong. HPMC EBITDA margins expanded to 24.2%, up 50 basis points sequentially and 190 basis points year-over-year. AA&S margins improved to 17.3%, a 290 basis point increase sequentially and a 250-point increase year-over-year. This reflects gains from ongoing transformation and efficiency efforts. Cash generation also remained strong. Through the third quarter, we have generated nearly $300 million in operating cash flow, supported by working capital improvements and strong earnings. We continue to monetize non-core assets, including the oil and gas rights sale and a small non-core machining divestiture, all while keeping capital investments focused and disciplined. Gross capital expenditures year-to-date totaled $188 million. Managed working capital as a percentage of sales remains around 36%, with opportunity to improve. We expect a strong finish to the year. The seasonal working capital release and projected strong Q4 performance position us for robust fourth quarter cash generation. Now let's look at our guidance for the fourth quarter and full year. Building on Kim's comments, we are raising full-year guidance to reflect stronger performance and visibility through year-end. Adjusted EBITDA, $848 million to $858 million, up $28 million at the midpoint. Adjusted EPS, $3.15 to $3.21. Free cash flow, $330 million to $370 million. CapEx, $260 million to $280 million. That's unchanged from prior guidance. Q4 adjusted EBITDA is projected at $221 million to $231 million, a sequential 5% increase, excluding oil and gas gains. The midpoint of $226 million is driven by continued growth in jet engine forgings, improved price and mix and sustained strength in defense programs. Turning to margins. Based upon our continued strong performance, I expect consolidated margins in Q4 will exceed 19% and full-year margins will be in the range of 18.5%. At the segment level, HPMC Q4 margins should continue to increase, exceeding Q3 margins of 24.2%. AA&S Q4 margins are expected to be between 16% and 16.5%, consistent with sales mix expectations. We expect another strong quarter of cash generation supported by collections and improved working capital efficiency. We are on track for $330 million to $370 million in adjusted free cash flow this year. This is a $40 million increase to the midpoint of the range. Gross capital expenditures will stay within the planned range of $260 million to $280 million, partially funded by proceeds from the sale of non-core assets. Cash generated from sales of non-core assets and businesses totaled approximately $30 million year-to-date and $76 million in 2024. Our focus remains on high-return, customer-supported investments that enhance mix, margin and long-term competitiveness. Each quarter this year, we have increased EBITDA, margins and cash generation. Q4 will build on that performance, creating momentum that we will carry into 2026.

Kimberly Fields, CEO

Thanks, Don. As we shared on September 11, Don has elected to retire from his role as CFO following our fourth quarter call. We'll have more to say about Don and his outstanding career next quarter, but I want to take a moment now to thank him for his leadership and many contributions that help put ATI in the strong position we're in today. The search for Don's successor is well underway. We're considering both internal and external candidates to identify the best possible leader. I'll share progress on the search in the months ahead for a seamless transition. Our disciplined financial strategy will continue. Before we turn to Q&A, I want to reflect on what makes ATI a compelling aerospace and defense story. When we began this transformation several years ago, ATI served a wide range of products and customers with limited concentration in our most differentiated materials. Fast forward to today and the transformation is clear. ATI is an aerospace and defense leader with more than 70% of our revenue coming from these high-value markets. In 2019, our margins were roughly half the 20% we delivered this quarter and our growth rates were more susceptible to price and input cost swings. Today, we are structurally stronger, anchored in differentiated materials, long-term customer relationships and sustainable pricing power. We've made tremendous progress, but we're not finished. The path forward centers on three levers: First, strategic pricing and mix optimization. Demand continues to outpace supply in key markets like jet engines, defense and specialty energy. We're optimizing our product mix at our most valuable assets to capture higher-value opportunities. Our long-term agreements and strategic pricing actions capture the value we deliver, securing the price, terms and pass-throughs that reflect our differentiated materials and the reliability our customers depend on. These long-term partnerships also underpin future investments and joint technology development, ensuring we expand capabilities in alignment with customers' needs. Our second lever is operational excellence and productivity. Across ATI, yield and throughput improvements are expanding capacity without adding capital. Product and process innovation drive efficiency and reliability, supporting record margins and cash generation across both segments. Our third lever is focus and simplification. We apply an 80-20 mindset, investing where ATI creates the most value and exiting where we don't. We're redeploying capital to high-value, high-growth areas. ATI is more agile, more profitable and better positioned to deliver long-term value. These levers are driving continued margin expansion, strong cash generation and higher returns on capital. Customers recognize ATI's reliable track record, long-term contracts and technical expertise, reinforce the surety supply our partners count on. ATI's foundation is strong. We're profitably growing, expanding margins and generating robust cash flow, trends we expect to continue well into the next decade. We're ahead of schedule on our 2027 growth and margin targets, and our business model provides clear visibility through 2030 and beyond. Even as customer build schedules fluctuate, ATI continues to gain share across A&D, optimize its asset base and deliver consistent growth and increasing returns. Our differentiated materials, technical expertise and integrated capabilities create a durable competitive moat, one that aligns closely with our A&D partners. We've accomplished a lot, and we're just getting started. With that, let's open the line for your questions.

Operator, Operator

Our first question comes from Richard Safran from Seaport Research Partners.

Richard Safran, Analyst

Don, congrats to you on the retirement, and thanks for all the help over the years. I appreciate it. Okay. So Kim, I heard your opening remarks, but I'm not exactly sure I understand what's changed since Q2 to drive the revised outlook and the guidance increase. So maybe you could discuss what's changed in your outlook and going to the moving pieces that drove this guidance increase we see today?

Kimberly Fields, CEO

Sure. Thanks, Rich. So let me start with the guidance reflecting that stronger-than-expected A&D performance. Particularly in defense, we had a tremendous quarter. And we see the A&D growth and momentum in the third quarter continuing through the rest of this year and frankly, into 2026. We delivered $225 million adjusted EBITDA. And excluding the oil and gas rights, that's $215 million. HPMC was over 24% in margin, AA&S was over 17%. And the operational productivity that I talked about is really starting to flow through, and we're seeing that in those margin numbers. Free cash flow continues to be a standout at $299 million year-to-date, up $273 million from last year. So as we look at the momentum that we built in the third quarter, we see that. We anticipate that strength going into Q4 across A&D and frankly, continuing into 2026. So overall, strength in markets and strength in our position and the returns that we're getting on the investments from an operational mix and pricing.

Richard Safran, Analyst

This next question is about nickel and titanium. You have many single-source nickel alloys, such as Rene 65. On the original equipment side, you're encountering challenges at Boeing and Airbus. There is also aftermarket demand. First, how are you managing the melt capacity you mentioned earlier? Second, Kim, you recently indicated that ATI is the leading source of flat-rolled titanium products for Airbus. What does that mean, and how will it impact the profit and loss statement?

Kimberly Fields, CEO

Sure, sure. So you're right. We continue to see record demand for premium nickel alloys, especially those used in next-generation engine products like LEAP and GTF as well as defense, which, as I just mentioned, we had a fantastic quarter. So we're seeing demand across all of those market segments. And meeting that demand this year has really been focused around that productivity and reliability, higher melt yields, more downstream processing, the increased testing capacity in our Forged Products business. Those actions are delivering these strong results that you're seeing in how we supported that more than 20% jet engine growth this year as well as the margins at HPMC over 24%. So we're going to continue to focus on expanding process efficiency and customer co-funded projects. And as I mentioned in my remarks, these investments will exceed 30% IRR, our internal rate of return targets, and ensure that supply assurance without adding unnecessary melt capacity. But at the same time, as you said, this demand that we're seeing this year is going to continue to grow. The other OEMs have said on their earnings calls, they're expecting this to continue to build and accelerate through the decade. And so we're also looking at selectively expanding our melt capacity to support that long-term growth, particularly in these high-priority proprietary alloys, those hot-section alloys I talked about two quarters ago, those five of seven, not the standard nickel alloys. So we're doing very purpose-built type of capital expansion. And these projects are being developed in partnership with our customers. They're backed by long-term agreements, they have co-funding to ensure the new capacity and capabilities align with the future needs of this market. And as I mentioned, all these products are well in excess of the 30% target. So it's important to remember, those proprietary alloys, in many cases, we are sole sourced on those five of seven in the hot section with very, very long qualification times and difficult learning curves and are under LTAs for decades. So we're managing it in the short term, both from a productivity standpoint to continue to improve our output from our current asset base and then in the long term, selectively investing purpose-built assets for those hot section alloys where we have those sole-source and long-term agreements. On the second question, you asked me around Airbus. Yes, that's, like I said, a great success story. I'll just remind everybody before COVID, we weren't shipping anything to Airbus at that time. We had just signed our first contract with them, we hadn't even started shipping. We went into COVID, Ukraine was invaded. And quickly, they needed to engage and get us up to speed became an imperative. And today, as I mentioned, when I say we're the #1 flat-rolled supplier in the industry, or I'm sorry, in the product portfolio that we're selling them, that means we're the majority supplier today. The share-based contracts allow us to expand that share in content as they continue to ramp and grow. There's mechanisms for pass-through for metal, inflation, tariffs. And we effectively, starting next year, double our Airbus revenue and expand those margins. So the benefit, as you asked to the P&L, comes through that stronger mix, consistent volume, expanded content and share and the higher margins from the premium titanium plate and sheet.

Richard Safran, Analyst

Regarding your comment on melt, are you suggesting that you are managing towards the high-margin products?

Kimberly Fields, CEO

We are, yes. In both the short and the long term, yes, we are optimizing the mix. So you see that in some of our aero-like and other categories and growth. So we are managing to the highest value mix in the short term and optimizing the throughput and output, and then in the long term, putting purpose-built assets in partnering with our customers for that.

Operator, Operator

Our next question comes from Myles Walton from Wolfe Research.

Myles Walton, Analyst

I was hoping to dig a little deeper into the engine mix that you have going on with MRO being 50% of total engine sales. How much of that do you have a sense is in-production MRO work or in-production engines being MROed versus out-of-production engines being MROed?

Kimberly Fields, CEO

As I review our engine mix, we are seeing a larger share of next-generation engines like the LEAP and GTF. This results in ongoing maintenance, repair, and overhaul activities and more extensive shop visits. Typically, when engines come in for upgrades to enhance their life and efficiency or during regular scheduled maintenance, the forge discs we produce are the primary focus. For us, the next-gen engines represent the bulk of our content, and it is these engines that benefit most from the powder and proprietary alloys I mentioned, which contribute to their improved efficiency and lifespan.

Myles Walton, Analyst

Okay. And a lot of the engine OEMs are talking about mid-teens type growth into next year. Is that something that would be in line with the level of growth you'd expect in your engine end-market?

Kimberly Fields, CEO

Yes, I believe that's consistent with our perspective. We anticipate continued growth in demand, not only in the short term but also throughout the decade. Our long-term agreements and strong relationships with customers allow for open communication and alignment. Being a sole source or proprietary supplier of alloys in the hot section enables us to collaborate closely. As you mentioned, we expect growth next year and across the decade, and we are making investments to ensure we can support that.

Operator, Operator

Our next question comes from Phil Gibbs from KeyBanc.

Philip Gibbs, Analyst

Good morning. So excluding the oil and gas rights, you were ahead of the midpoint by about $10 million in the quarter for your adjusted EBITDA. Should we think about that based on some of the comments you were providing earlier that maybe half of that is operational and half of that is due to the stronger or strong defense sales you had in the quarter?

Kimberly Fields, CEO

Yes, I think that's fair. We have made progress across all our assets. Defense was a standout area, and the team performed exceptionally well. Defense continues to grow at double-digit rates for us, particularly in missiles, naval nuclear, and rotary programs. We experienced some demand last quarter that will carry through the rest of this year and into next year, allowing us to concentrate on our efforts. You may have noticed some numbers fluctuating as we prioritized shipments to those customers. We anticipate that double-digit growth in defense will persist into 2026, with systems like THAAD and PAC-3 continuing to expand. We are integrating these mature programs with innovative new projects like the MV-75 and the F-47. Our focus will remain on productivity to ensure we can meet the consistently strong demand from the aerospace and defense sector.

Philip Gibbs, Analyst

So Kim, the defense sales levels overall, do you expect those to continue in the fourth quarter? Or was some pulled into the third quarter?

Kimberly Fields, CEO

No, we had significant shipments from the forging business in the third quarter, and we expect that to moderate a bit as we enter the fourth quarter. However, looking ahead, the demand from defense programs is expected to keep growing through the fourth quarter and into 2026. That said, there will be an increase in jet engine deliveries in the fourth quarter. As I mentioned, we prioritized some of our resources and shipments in the third quarter for immediate defense needs, and those will start to bounce back and increase.

Philip Gibbs, Analyst

And then lastly, on the net working capital side, that was a pretty strong improvement in terms of the free cash flow bridge. Where is that coming from predominantly? Is it mostly inventory? Or is it some inventory and payables? Just curious on that.

Donald Newman, CFO

I'll tell you, I'll take that question. Part of the improvement that we saw in working capital really throughout the year, but especially in Q3, was tied to our management of accounts receivable. Now we are making progress certainly on the inventory side of the house, we've improved our efficiencies and our intensity there. But for accounts receivable, we put in place a securitization facility. And that securitization facility, we did execute some of the AR factoring in the period. And so that benefited some of our working capital efficiencies in Q3. But as you take a step back, though, and you look at the full-year guidance when it comes to free cash flow, clearly, we're making progress, both operationally and the cash that's generated through operations. And we are making progress across the working capital, especially AR and inventory, to improve that part of our cash generation.

Operator, Operator

Our next question comes from Gautam Khanna from TD Cowen.

Gautam Khanna, Analyst

Congrats, Don. I know we have you for a little longer, but congrats. Guys, I had a couple of quick questions. You did mention, in 2026, you expect airframe sales to be up high single-digit. And I wanted to ask if you had any other preliminary color you could provide on 2026 with respect to other end-markets, like jet engine? Maybe if you could just opine generically on incremental margins at HPMC? Any sort of parameters you'd give us as we start to pencil in '26?

Kimberly Fields, CEO

I’ll discuss the guidance now. Don will provide some insights on the incremental margins, which we expect to see expand. For 2026, we are anticipating steady growth in airframe sales throughout the year, starting modestly and increasing as we move into the second half of the year, accelerating as the planned increase rates take effect. In terms of engines, we are also observing continued growth and strength in that area. While we are not offering specific guidance on every market, we wanted to address airframe since there were many questions about it last quarter. We will provide official guidance and all related numbers in the first quarter as we finalize our plans. However, we do expect demand for jet engines to remain exceptionally strong through next year and into 2027 based on our current order book and observations.

Donald Newman, CFO

I would love to address that. Yes, we've been experiencing excellent performance regarding our incremental margins, approaching 50% year-to-date, which pleases us. This outcome aligns with our past expectations. We have indicated that incremental margins typically fall within the 30% to 40% range, with 40% associated with HPMC expectations and 30% more aligned with AA&S. As we improve our mix, capture pricing, and enhance efficiencies, we anticipated that our incrementals would also improve, and we have observed this in the initial quarters of the year. The main question is whether this trend signals a new incremental benchmark for modeling. For now, we recommend maintaining the 30% to 40% range. In the near future, management may inform investors and analysts if there's a need to raise that margin. Personally, while I'm pleased with our performance, I continue to model the business using that 30% to 40% range, though I expect to see the improvement we have indicated as time progresses.

Operator, Operator

Our next question comes from Andre Madrid from BTIG.

Andre Madrid, Analyst

Don, congratulations. Again, I'm glad we have you for one more, but it's been a pleasure. So you called out naval nuclear as one of the main drivers at defense, but maybe could you just give us a status update there on the zirc supply chain and how things are going there vis-a-vis China?

Kimberly Fields, CEO

Yes. The news is ever-changing depending on whether we have a trade deal. However, the supply chain for the zirconium product has remained very stable. We haven't experienced any concerning impacts from our perspective. As I've mentioned before, we have built stockpiles of both raw materials and finished products to ensure we can manage any intermittent disruptions that may arise from trade negotiations. Therefore, we are in a strong position regarding our supply chain. Looking at the market, I expect positive momentum as we approach Q4. We have taken this past couple of quarters to upgrade our equipment with customer-funded capital, as our clients are recognizing the tight demand in areas like nuclear, defense, and gas turbine energy. We anticipate starting to see the benefits from these upgrades. The demand fundamentals are solid, and we are working on new qualifications and materials to get approved for those applications as well.

Andre Madrid, Analyst

Understood. Can you provide insight into how much demand is reflected in the stockpiles? Is it equivalent to one year or two?

Kimberly Fields, CEO

We generally have about two years of finished product inventory and over a year of raw material inventory. It's important to note that the raw materials for zirc account for only half of what we use to produce our zirc product, and they represent a relatively low dollar value. This allows us to hold large amounts of raw material inventory without any issues. We haven't had the need to draw from this inventory this year and are effectively managing it. There haven't been any disruptions; the flow has been good, and this situation remains stable for now. If there were any unexpected disruptions, we are well-positioned to navigate through them.

Andre Madrid, Analyst

Got it. Got it. And if I could just squeeze one more in, I mean, you said MRO is roughly half of engine. What was that percentage previously, pre-COVID and whatnot?

Kimberly Fields, CEO

Yes. Pre-COVID, I would say, typically, we were at about 20% to 25%. And we've seen that accelerate rapidly. And you know all of these things, Andre, as you look at shop visits and the airlines waiting on planes to get delivered to some of those older planes staying in service longer. I think the other aspect is the next-gen engines. They're continuing to drive lifing and efficiency, so they're doing upgrade packages. So all of those are coming to bear. And again, they all hit squarely into that hot section, those forge discs, that have so much wear that basically provides a threat for the engine and the plane to get off the ground. And so we are seeing, like I said, a substantial increase. And I won't talk for the OEMs. They're sharing it publicly, but they're sharing with us that they're seeing this to continue through the decade as we go forward and these engines get into their first and second shop visits.

Operator, Operator

Our next question comes from Seth Seifman from JPMorgan.

Seth Seifman, Analyst

Thank you very much for the positive results and remarks. Don, I appreciate all your efforts. To start, you mentioned a change in the contract structure for the HPMC business that shifts the focus more towards recognizing the value you add through your work rather than just the materials. Do you expect to see more of this happening? What factors influence when this change occurs and when it doesn’t?

Donald Newman, CFO

Seth, it's Don. So let me take that one. You're right. In the quarter, we highlighted because we were wanting to explain the movement in our jet engine revenue sequentially. We highlighted that we had a contract, a particular contract that we had converted from a materials and conversion structure, which means we would buy the material and convert the material and sell the product to our customers. We converted at the request of our customer, that contract to a conversion only. What that means is if we don't buy the material, they provide the material. And the long and the short of that is you have less revenue that you recognize. It doesn't negatively impact your bottom line and it can actually be a help to your margins. So that's the background there. Is it a trend? Well, it's not unusual in our business to have conversion contracts. We don't see a trend that the material contracts will transition to conversion contracts. It was, I would say, generally an isolated situation where it shifted over. That particular contract had about a $10 million effect on revenue from Q2 to Q3. That particular contract will be with us through the end of this year. So you'll see that same effect in Q4. But no, not a trend and no messaging around this particular change.

Seth Seifman, Analyst

Excellent. Great. I think this probably follows up a little bit on Andre's question. In the slides, you mentioned that specialty energy is a longer-term growth market. There has been some growth in recent years, but not much, and it is down this year. How do you perceive the timeframe for that? Should we consider it linked to developments in nuclear energy or other factors?

Kimberly Fields, CEO

Yes. I would say we're going to start to see growth in that market segment next quarter, and that's going to continue to accelerate as we go into 2026. For us, and you're right to point that out, it's both. It's both gas turbine. And I'd say that is going to be in the immediate the next few quarters. You'll see that will be what's behind that growth, and you'll see that continue to increase. We are in the process of developing some new materials there and getting qualified. And so there is significant demand there. I'd say on the nuclear side, as you said, we are in a unique position. We're one of the only western suppliers of some of the zirconium in the tubing form that is really needed for the commercial nuclear facilities globally. And so that business, as I mentioned, we did some upgrades, we put some capacity, freed up some bottlenecks there. And so we're going to see that continue to grow. I know they're trying to fast-track some of those nuclear facilities and bringing them back online. And we're seeing that demand come in now in orders for that today. So both of them, but I'd say the gas turbine really being driven by the data centers and the demand for energy. And for both, this is a market that we don't spend a ton of time talking about aerospace. But it really leverages our differentiated materials, our breadth of materials, zirconium, hafnium, as well as titanium and nickel products. And those capabilities, I know we've mentioned it. I probably underemphasized the capabilities of our assets and the flexibility of those to be able to flex into some of these markets where there are very few, if any, in the Western world that have those capabilities in that product form. So we are seeing a lot of demand. I'm very excited about the future for energy for us. I do think it's a small part of our business today, but I do see that growing, and it's a very profitable part of our overall portfolio.

Operator, Operator

We currently have no further questions. So I'll hand back to Kim Fields for closing remarks.

Kimberly Fields, CEO

Thanks. Well, thank you, everybody, for the call today. As I said, we had a fantastic quarter. I'm very pleased with the results that we've demonstrated in the third quarter and the momentum that we see going into the fourth quarter and frankly, into 2026. Next quarter, we'll share our official formalized guidance. But just to close on, we're going to stay focused on where we're most differentiated, those advanced materials and forgings for aerospace and defense. The next phase is really around growing our content per platform, scaling those co-funded investments and improving operational leverage. We continue to see that mix grow. And A&D is going to continue to grow faster probably than our other markets as we go into next year. And that momentum will continue from Q4 to 2026. Over time, like I said, the bottom line is our transformation is working. We're seeing that in both our margins, our mix, and our overall growth. Now it's really about compounding that performance for the rest of this year and into 2026. Thank you guys for your time. I really appreciate it, and I'll talk with you later.

Operator, Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.